The national negative equity rate plummeted at the fastest pace ever in the third quarter, with 21% of all mortgage homeowners in an underwater state, real estate website Zillow said.
The new rate is an improvement with it equating to more borrowers landing in positive territory, the latest data from Zillow says.
Since its peak in the first quarter of 2012, the rate has fallen by one-third, to 21% from 31.4%.
"Rising home prices and a greater willingness among lenders to engage in short sales have both contributed substantially to the significant decline in negative equity this quarter. We should feel good that we’re moving in the right direction and at a fast clip," said Zillow Chief Economist Stan Humphries.
Due to the substantial drop, approximately 1.4 million homeowners were freed from their upside-down state in the third quarter from the second quarter, bringing the total number of recovered homeowners since 2012 to 4.9 million.
Still, roughly 10.8 million homeowners remain underwater and owe more on their homes than they're worth.
The negative equity rate among homeowners, both with and without a mortgage, hit 14.7% at the end of the third quarter, a decline from 16.7% in the second quarter.
However, Humphries added, "Negative equity will remain a factor for years to come, and must be considered part of the new normal in the housing market. Short sales will remain a persistent feature of the market as many homeowners remain too far underwater for reasonable price appreciation alone to help."
On less of a good note, the effective negative equity rate, which includes those homeowners with a mortgage with 20% or less equity in their homes, was 39.2% in the third quarter.
“But despite the improvements, more than one in five American homeowners with a mortgage remains underwater, a stubbornly high rate that is contributing to inventory shortages and holding back a full market recovery," the report said.
Zillow estimates that as the pace of home value appreciation slows, so will the pace of negative equity improvement, with the negative equity rate expected to fall to 18.8% by the third quarter of 2014.
In top metros specifically, Las Vegas, Atlanta and Orlando witnessed the highest negative equity rate at 39.6%, 38.2% and 34.2%, respectively.
Comparatively, the metros with the greatest decline in the number of underwater homeowners since their peak include San Jose, Denver and San Francisco at -66.4%, -63.3% and -59.6%, respectively.